Debt settlement firms rife with fraud: GAO

WASHINGTON Thu Apr 22, 2010 5:49pm EDT

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WASHINGTON (Reuters) - A big percentage of debt settlement companies lie to and defraud people who contact them asking for help with credit problems, according to a GAO report and law enforcement authorities who spoke at a U.S. Senate Commerce Committee hearing on Thursday.

Sen. Jay Rockefeller said he expressed "disdain and contempt" for practices that the Government Accountability Office found when they had investigators posing as ordinary consumers with debt problems contact 20 debt settlement firms.

The investigators were told that they had to pay fees up front to begin the settlement process, that they should stop payments on credit cards even if they were current and that the company's settlement success rate was as high as 100 percent.

In contrast, the typical success rate -- according to the GAO -- was less than 10 percent.

The GAO report said that a growing number of for-profit debt settlement companies -- which negotiate for consumers with creditors -- have emerged amid stubbornly high jobless figures. One result has been hundreds of thousands of allegations of wrongdoing by the companies, and a growing number of legal actions filed by federal and state authorities, the GAO said.

Phil Lehman, a North Carolina assistant attorney general, said it was common for debt settlement companies to make "grandiose" promises and mislead consumers about fees.

Commissioner Julie Brill of the Federal Trade Commission said that large fees for little result was not uncommon. "The GAO's disturbing findings are consistent with what the FTC has found," she said.

John Ansbach, general counsel for the debt settlement company EFA Processing, defended the goal of the industry while acknowledging the need for more disclosure requirements and other regulation.

"We work very hard to help folks," he said, adding: "I think there are some significant issues in the industry and we need to address them."

Ansbach argued against banning upfront fees, however.

"Eight-five percent of our industry said they will go out of business if there is an advanced fee ban," he said.

That interested Sen. Claire McCaskill, who said: "If doing away with advance fees does away with these companies, (it's) probably a good thing."

(Reporting by Diane Bartz; Editing by Phil Berlowitz)

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